It's The Economy, Stupid

by: Romano Bastianpillai

Politicians aren't economists. This adage has never been more relevant- and it's nauseating to stomach that the American "Jobs" Act, is a means of returning the US to economic relevance. Corporate America is the engine of the economy, and simply taxing productive corporations and diverting resources to non-productive entities doesn't seem like an intuitive way to promote growth. My favorite economist, Larry Kudlow said it best: "We believe that free market capitalism is the best path to prosperity."

I believe there are two vital phases of an economic recovery. The first, being government stimuli. A double-dose of fiscal (policy implemented by the federal gov) and monetary policy (policy implemented by the Federal Reserve and it's chairman Ben Bernake) is important to provide the foundations of economic stability. In order to sustain economic growth, the second phase is instrumental: Corporate expansion. Corporate expansion results in increased jobs, trade, manufacturing, investments, wealth and confidence. These are the vital ingredients for a recovery and Washington needs to take heed.

Here's my strategies for economic growth. Some may appear radical. But they may be worth a shot.

(i) ABOLISH INCOME AND PROPERTY TAX AND INSTITUTE A VALUE ADDED TAX

Deficit. Deficit. Deficit. Those words are rolling from everyone's lips yet no one seems to be talking about a fundamental flaw that's causing the deficit. The government is too reliant on cyclical income sources that evaporate as the economy sours. During recessionary times, unemployment tends to increase and property values fall. This implies that the government receives less income in the form of payroll taxes and property taxes- which account for a significant chunk of it's revenue. This is an issue that will continually recur as the economy dips in the future. The key here is to reduce exposure to such a volatile income and rely on a more consistent source, such as a Value Added Tax (VAT). A VAT is a flat tax charged on goods and services. Essentially, consumption would be taxed as opposed to income. Although consumption is subject to whims of the economy, it is relatively stable as people always need to consume. Benefits of a VAT system include being rewarded for saving and investing as opposed to spending, increased employment as businesses aren't subject to payroll taxes, a more stable source of income for the government, and an improved housing market as it's cheaper to be a home owner. And for those who believe that the rich should pay more taxes, the rich generally consume more and hence would theoretically pay more VAT.

(ii) A NEW, NEW DEAL

I value a limited welfare system. Every government has a duty to ensure the well-being of their country's constituents. This being said, welfare checks create complacency. Why not implement a new FDR-style-New Deal? Welfare and social security benefits should be paid out, but these should be distributed with stipulations. Such stipulations include compulsory skills training courses, assisting with infrastructure projects that benefit the county (i.e freeway construction, park maintenance etc) or even volunteering at a hospital or food bank. This benefits the recipient in regards to honing their skills and it also improves the community. This seems significantly more productive than blindly handing out checks.

(NASDAQ:III) QE3

Quantitative Easing is a form of monetary policy that has recently been implemented by the Federal Reserve. The Fed purchases financial assets such as treasuries or mortgage-backed securities (MBS). In short, the sales result in deposits of money at banks which results in an increase of credit available for borrowers. In the case of purchasing treasuries, the demand for the asset increases, that results in an increase in price and a corresponding reduction in yield. Interest rates typically track treasury yields so quantitative easing results in reduced interest rates, or in other words- the cost of borrowing is cheaper. I believe a third round of Quantitative Easing (QE3) is necessary to maintain low interest rates. This allows small businesses to borrow money and grow, current homeowners to refinance and save money, prospective homeowners to borrow money at attractive rates and large firms to borrow capital at historically low rates for further expansion.

(iv) MARKET CLARITY

Regardless of the policies implemented by Washington, there needs to be clarity. Corporations are sitting on mountains of cash but the uncertain political environment has made it irrational for businesses to jump the gun and engage in any significant business expansion. Washington's bickering needs to stop and sound, coherent policies need to be implemented soon. Of course, that may be asking for too much.....

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.